HEAVY EQUIPMENT LEASINGWhat factors can have a negative impact to profitability of leasing and long term rental contracts?

• Excessive initial price• Abuse of equipment• Missing maintenance• Excessive repair cost• Bad condition on return• Insolvent contractor• Wrong residual value

estimation• Ongoing low interest rates

Exccesive Initial Price

Suppliers of trucks and machinery have often a long-term relation. Sometimes they will agree on delivery and service terms that are less beneficial for the bank or leasing companies. It could be for instance additional work tools or machine features. Even fees for future service supply could become hidden in an increased initial price.

Extended Repair Bills

On the other side, if service for machine breakdown after period of warranty has to be paid by the owner (bank) there will be excessive repair bills from time to time.

Lack of Maintenance

If contractors do not have a full-service contract with the machine supplier they have to carry all cost of maintenance for long-term rental or leasing. If no control takes place, in many cases, the customer service is reduced to the essential necessary. Repairs will be performed by non-OEM providers.

Abuse of Equipment

To reduce the cost contractors or sales staff sometimes decide to choose smaller machines or trucks that would be appropriate for a specific job. Such a decision causes then a steady overload of trucks and extended wear on machines as these are running above the limits.

Bad Condition on Return

The debate begins often at the time of re-delivery. Who has to take which share of the costs. What damages need to be repaired by the contractor and what damages are normal and acceptable for 48 months old machine. Are tires above or less than 50%? Are the attached work tools in appropriate condition?

Insolvent Contractors

The worst case for a leasing provider would be a returning machine in bad shape and an insolvent contractor at the same time. In this case, a loss for the bank is inevitable.

Wrong Residual Values

Banker understand a lot of interest, residual value calculation based on tables and the theoretical side of the deposit transactions. Based on past experience, remaining values for the future are analyzed. The problem therefore is rather in a lack of technical expertise. The influences of different specifications to the residual values are underestimatedOngoing low interest rates

No need to explain the influence of ongoing low interest rates to the profit of leasing contracts. All banks and leasing companies make most probably the experience of raising difficulties to refinance.

PROPOSALS FOR RISK REDUCTIONGet external expertise. It costs less than you think.

Many of the scenarios previously described can be prevented for reasonable cost. Select a professional technical advisor that is familiar with construction machinery and commercial vehicles. Negotiate with him a service contract with reasonable conditions.Send him one or two times a year to inspect all valuable assets that are on lease. If he is experienced and has a good market knowledge the advisor should be able to support you with advise about initial and residual values.While an on-site inspection of machines the technician could gather information from operators and staff about maintenance, appropriate use of equipment and of course of current equipment condition.

MACHINERY PROFESSIONALSA network of machinery inspectors in Europe

Mevas is a service provider from Germany. With a European network of machinery inspectors the company provides professional analysis of machinery and truck conditions. Mevas evaluates single machines or even fleets of equipment.An annual inspection of machines or trucks would cost probably less than 200 Euro per unit if a certain number of inspections would be required.Various solutions are conceivable. Contact the Mevas management please. A cooperation should be discussed in a personal conversation.

Mevas Machinery EvaluationManaging Director:Wolfgang Bühn

www.mevas.eu

Phone +49 35206 39150

01728 BannewitzGermany

Copyright: Wolfgang Bühn, Mevas Germany